##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedJune 30, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-16265
 
 ELECTRIC CITY CORP.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    36-4197337
(I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
  (847) 437-1666
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o þ




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ELECTRIC CITY CORP.
 FORM 10-Q  For The Quarter Ended June 30, 2005
 INDEX
 PageNumberPart I Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets
June 30, 2005 (unaudited) and December 31, 2004
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended June 30, 2005 and 2004 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Six Months Ended June 30, 2005 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2005 and 2004 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    19ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4. Control and Procedures
    
    
    29Part II. Other Information:ITEM 2. Changes in Securities
    
    
    30ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    31ITEM 6. Exhibits
    
    
    32Signatures
    
    
    32Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 302005
    
    
    December 31,(unaudited)
    
    
    2004(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    3,926,058
    
    
    $
    1,789,808Accounts receivable, net
    
    
    725,038
    
    
    
    1,067,104Inventories
    
    
    1,641,085
    
    
    
    1,029,645Advances to suppliers
    
    
    451,413
    
    
    
    Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    145,179
    
    
    
    Prepaid expenses and other
    
    
    198,254
    
    
    
    90,727Total Current Assets
    
    
    7,087,027
    
    
    
    3,977,284Net Property and Equipment
    
    
    2,267,424
    
    
    
    1,985,561Deferred Financing Costs
    
    
    48,906
    
    
    
    99,902Intangibles, net
    
    
    2,314,659
    
    
    
    Cost in Excess of Assets Acquired
    
    
    4,602,557
    
    
    
    416,573$
    16,320,573
    
    
    $
    6,479,320
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##### Table of Contents



ELECTRIC CITY CORP.
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,2005
    
    
    December 31,(unaudited)
    
    
    2004(1)Liabilities and Stockholders EquityCurrent LiabilitiesLine of Credit
    
    $
    2,000,000
    
    
    $
    Current maturities of long-term debt
    
    
    1,036,147
    
    
    
    424,451Accounts payable
    
    
    1,332,044
    
    
    
    1,284,421Accrued expenses
    
    
    954,085
    
    
    
    567,689Notes payable
    
    
    231,999
    
    
    
    Deferred revenue
    
    
    585,993
    
    
    
    437,419Customer deposits
    
    
    1,447,278
    
    
    
    1,000,000Total Current Liabilities
    
    
    7,587,546
    
    
    
    3,713,980Deferred Revenue
    
    
    823,729
    
    
    
    179,167Long-Term Debt, less current maturities, net of unamortized
discount of $24,501 and $50,048 at June 30, 2005 and
December 31, 2004, respectively
    
    
    64,937
    
    
    
    805,902Total Liabilities
    
    
    8,476,212
    
    
    
    4,699,049Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
Series E - 229,333 and 224,752 issued and outstanding as of
June 30, 2005 and December 31, 2004, respectively
(liquidation value of $45,867,000 and $44,950,000
at June 30, 2005 and December 31, 2004,
respectively)
    
    
    2,293
    
    
    
    2,248Common stock, $.0001 par value; 200,000,000 shares
authorized, 50,813,503 and 41,612,610 issued as of June
30, 2005 and December 31, 2004, respectively
    
    
    5,083
    
    
    
    4,163Additional paid-in capital
    
    
    63,862,760
    
    
    
    55,299,743Accumulated deficit
    
    
    (56,025,775
    )
    
    
    (53,525,883
    )Total Stockholders Equity
    
    
    7,844,361
    
    
    
    1,780,271$
    16,320,573
    
    
    $
    6,479,320
 See accompanying notes to condensed consolidated financial statements
 
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2004 - 2 -




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ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Three months ended, June 30
    
    2005
    
    
    2004Revenue
    
    $
    1,791,480
    
    
    $
    555,537ExpensesCost of sales
    
    
    1,689,905
    
    
    
    597,082Selling, general and administrative
    
    
    1,687,210
    
    
    
    974,4703,377,115
    
    
    
    1,571,552Operating loss
    
    
    (1,585,635
    )
    
    
    (1,016,015
    )Other Income (Expense)Interest income
    
    
    18,303
    
    
    
    7,372Interest expense
    
    
    (257,302
    )
    
    
    (136,505
    )Total other income (expense)
    
    
    (238,999
    )
    
    
    (129,133
    )Net Loss
    
    
    (1,824,634
    )
    
    
    (1,145,148
    )Plus Preferred Stock Dividends
    
    
    (339,000
    )
    
    
    (622,884
    )Net Loss Available to Common Shareholder
    
    $
    (2,163,634
    )
    
    $
    (1,768,032
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.05
    )
    
    $
    (0.04
    )Weighted Average Common Shares Outstanding
    
    
    47,927,901
    
    
    
    40,938,395
 See accompanying notes to condensed consolidated financial statements
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ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Six months ended, June 30
    
    2005
    
    
    2004Revenue
    
    $
    2,532,754
    
    
    $
    1,371,779ExpensesCost of sales
    
    
    1,958,866
    
    
    
    1,383,091Selling, general and administrative
    
    
    2,766,830
    
    
    
    2,002,1094,725,696
    
    
    
    3,385,200Operating loss
    
    
    (2,192,942
    )
    

    
    (2,013,421
    )Other Income (Expense)Interest income
    
    
    25,287
    
    
    
    11,736Interest expense
    
    
    (332,237
    )
    
    
    (501,191
    )Total other income (expense)
    
    
    (306,950
    )
    
    
    (489,455
    )Net Loss
    
    
    (2,499,892
    )
    
    
    (2,502,876
    )Plus Preferred Stock Dividends
    
    
    (673,800
    )
    
    
    (3,786,905
    )Net Loss Available to Common Shareholder
    
    $
    (3,173,692
    )
    
    $
    (6,289,781
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.07
    )
    
    $
    (0.16
    )Weighted Average Common Shares Outstanding
    
    
    44,864,259
    
    
    
    38,244,878
 See accompanying notes to condensed consolidated financial statements
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ELECTRIC CITY CORP.
 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
(Unaudited)
 Series E
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Preferred
    
    
    Series E Preferred
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersCommon Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2004
    
    
    41,612,610
    
    
    $
    4,163
    
    
    
    224,752
    
    
    $
    2,248
    
    
    $
    55,299,743
    
    
    $
    (53,525,883
    )
    
    $
    1,780,271Conversion of Series E Preferred Stock
    
    
    215,700
    
    
    
    22
    
    
    
    (2,157
    )
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock (less issuance costs
of $216,787)
    
    
    6,250,000
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    5,407,588
    
    
    
    
    
    
    
    5,408,213Shares issued for acquisition of Maximum
Performance Group, Inc.
    
    
    2,509,708
    
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    2,710,234
    
    
    
    
    
    
    
    2,710,485Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (673,800
    )
    
    
    
    
    
    
    (673,800
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    6,738
    
    
    
    67
    
    
    
    673,733
    
    
    
    
    
    
    
    673,800Common stock issued for services received
    
    
    225,485
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    125,462
    
    
    
    
    
    
    
    125,484Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,800
    
    
    
    
    
    
    
    319,800Net loss for the six months ended June 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,499,892
    )
    
    
    (2,499,892
    )Balance,June 30, 2005
    
    
    50,813,503
    
    
    $
    5,083
    
    
    
    229,333
    
    
    $
    2,293
    
    
    $
    63,862,760
    
    
    $
    (56,025,775
    )
    
    $
    7,844,361
 See accompanying notes to condensed consolidated financial statements.
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ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six months ended June 30
    
    2005
    
    
    2004Cash Flow from Operating ActivitiesNet loss
    
    $
    (2,499,892
    )
    
    $
    (2,502,876
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitionDepreciation and amortization
    
    
    159,500
    
    
    
    28,838Warrants issued in exchange for services received
    
    
    319,800
    
    
    
    Amortization of deferred financing costs
    
    
    50,996
    
    
    
    309,765Amortization of original issue discount
    
    
    25,547
    
    
    
    155,183Accrued interest converted to common stock
    
    
    
    
    
    
    4,736Changes in assets and liabilities, net of acquisitionsAccounts receivable
    
    
    634,168
    
    
    
    312,247Inventories
    
    
    (285,318
    )
    
    
    (229,097
    )Advances to suppliers
    
    
    21,276
    
    
    
    Other current assets
    
    
    (189,094
    )
    
    
    (62,100
    )Accounts payable
    
    
    (880,886
    )
    
    
    (359,133
    )Accrued expenses
    
    
    (272,545
    )
    
    
    (67,440
    )Deferred revenue
    
    
    (218,480
    )
    
    
    49,065Other current liabilities
    
    
    (78,398
    )
    
    
    488,833Net cash used in operating activities
    
    
    (3,213,326
    )
    
    
    (1,871,979
    )Cash Flows Used In Investing ActivitiesAcquisition (including acquisition costs), net of cash acquired
    
    
    (1,644,419
    )
    
    
    Purchase of property and equipment
    
    
    (201,814
    )
    
    
    (11,804
    )Net cash used in investing activities
    
    
    (1,846,233
    )
    
    
    (11,804
    )Cash Flows Provided by Financing ActivitiesBorrowings on line of credit
    
    
    2,000,000
    
    
    
    Payment on long-term debt
    
    
    (212,404
    )
    
    
    (19,542
    )Preferred stock redemption
    
    
    
    
    
    
    (7,000,006
    )Proceeds from issuance of common stock
    
    
    5,625,000
    
    
    
    11,000,000Issuance costs related to stock issuances
    
    
    (216,787
    )
    
    
    (897,135
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    193,648Net cash provided by financing activities
    
    
    7,195,809
    
    
    
    3,276,965Net Increase in Cash and Cash Equivalents
    
    
    2,136,250
    
    
    
    1,393,182Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    3,926,058
    
    
    $
    3,860,205Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    81,039
    
    
    $
    41,126Supplemental Disclosures of Noncash Investing and Financing ActivitiesConversion of convertible debt to common stock
    
    $
    
    
    
    $
    270,863Accrued interest satisfied through the issuance of common stock
    
    
    
    
    
    
    4,736Certain holders of Series E preferred stock converted 2,157 shares of Series E preferred stock
into 215,700 shares of the Companys common stock during the first quarter of 2005.
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Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Property and equipment
    
    
    121,608Intangible assets
    
    
    2,432,600Cost in excess of assets acquired
    
    
    4,185,984Total assets acquired
    
    
    7,894,716Accounts payable
    
    
    (928,509
    )Accrued expenses
    
    
    (658,940
    )Deferred revenue
    
    
    (1,011,616
    )Other current liabilities
    
    
    (525,675
    )Notes payable
    
    
    (289,587
    )Total liabilities assumed
    
    
    (3,414,327
    )Net assets acquired
    
    
    4,480,389Less valuation of shares issued for acquisition
    
    
    (2,710,485
    )Acquisition costs paid through the issuance of common stock
    
    
    (125,485
    )Total cash paid, including acquisition costs
    
    $
    1,644,419
 See accompanying notes to condensed consolidated financial statements
 - 7 -




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Electric City Corp.
 
 Notes to Financial Statements
 Note 1  Basis of Presentation
     Note 2  Stock-based Compensation
  - 8 -




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Three Months Ended
    
    Six months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Net Loss, as reported
    
    $
    (1,825,000
    )
    
    $
    (1,145,000
    )
    
    $
    (2,500,000
    )
    
    $
    (2,503,000
    )Deduct: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Add: Total stock-based
employee compensation (expense)
income determined under fair value
based method for awards 1
    
    
    (345,000
    )
    
    
    (397,000
    )
    
    
    (504,000
    )
    
    
    (528,000
    )Net Loss, pro-forma
    
    
    (2,170,000
    )
    
    
    (1,542,000
    )
    
    
    (3,004,000
    )
    
    
    (3,031,000
    )Preferred stock dividends
    
    
    (339,000
    )
    
    
    (623,000
    )
    
    
    (674,000
    )
    
    
    (3,787,000
    )Net Loss Available to
Common Shareholder
    
    $
    (2,509,000
    )
    
    $
    (2,165,000
    )
    
    $
    (3,678,000
    )
    
    $
    (6,818,000
    )Net loss per shareBasic and diluted 
as reported
    
    $
    (0.05
    )
    
    
    (0.04
    )
    
    $
    (0.07
    )
    
    
    (0.16
    )Basic and diluted 
pro-forma
    
    $
    (0.06
    )
    
    
    (0.05
    )
    
    $
    (0.08
    )
    
    
    (0.18
    )
 
 1
    
    All awards refer to awards granted, modified, or settled in fiscal periods beginning after December 15,
1994  that is, awards for which the fair value was required to be measured and disclosed under Statement 123.  Note 3  Revenue Recognition
   - 9 -




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Note 4  Recent Accounting Pronouncements
  Note 5  Acquisition of Maximum Performance Group, Inc.
   - 10 -




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##### Table of Contents



Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Net property and equipment
    
    
    121,608Identifiable intangible assets
    
    
    2,432,600Goodwill
    
    
    4,185,984Accounts payable
    
    
    928,509Accrued expenses
    
    
    658,940Deferred revenue
    
    
    1,011,616Other current liabilities
    
    
    525,675Notes payable
    
    
    289,587
 - 11 -




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Three months
    
    Six monthsended June 30,
    
    ended June 30,2005
    
    2005Revenue:As Reported
    
    $
    1,791,480
    
    
    $
    2,532,754Proforma
    
    
    2,090,901
    
    
    
    3,682,501Net Loss:As Reported
    
    
    (1,824,634
    )
    
    
    (2,499,892
    )Pro-forma
    
    
    (2,237,159
    )
    
    
    (3,150,945
    )Basic and Diluted Loss per Share:As Reported
    
    
    (0.05
    )
    
    
    (0.07
    )Pro-forma
    
    
    (0.07
    )
    
    
    (0.08
    )
 Note 6  Net Loss Per Share
  - 12 -




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Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Weighted average shares
issuable upon exercise of
outstanding options
    
    
    11,648,000
    
    
    
    10,574,000
    
    
    
    11,436,000
    
    
    
    10,496,000Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    13,734,000
    
    
    
    11,157,000
    
    
    
    12,463,000
    
    
    
    10,407,000Weighted average shares
issuable upon conversion
of preferred stock
    
    
    22,598,000
    
    
    
    21,712,000
    
    
    
    22,462,000
    
    
    
    24,326,000Weighted average shares
issuable upon conversion of
convertible debt
    
    
    2,233,000
    
    
    
    319,000
    
    
    
    1,656,000
    
    
    
    334,000Total
    
    
    50,213,000
    
    
    
    43,762,000
    
    
    
    48,017,000
    
    
    
    45,563,000
  Note 7  Warranty Obligations
  - 13 -




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Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Balance, beginning of period
    
    $
    172,424
    
    
    $
    126,735
    
    
    $
    151,008
    
    
    $
    121,702Warranties issued
    
    
    49,750
    
    
    
    4,000
    
    
    
    81,798
    
    
    
    12,250Settlements
    
    
    (15,279
    )
    
    
    (2,553
    )
    
    
    (25,911
    )
    
    
    (5,770
    )Balance, as of June 30
    
    $
    206,895
    
    
    $
    128,182
    
    
    $
    206,895
    
    
    $
    128,182
 Note 8  Inventories
  June 30,
    
    December 31,2005
    
    2004Raw materials
    
    $
    933,640
    
    
    $
    528,718Work in process
    
    
    4,767
    
    
    
    Finished goods
    
    
    702,678
    
    
    
    500,927$
    1,641,085
    
    
    $
    1,029,645
 Note 9  Line of Credit
  - 14 -




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Note 10  Dividends
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Accrual of Dividend on Series
A Convertible Preferred
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    540,705Accrual of Dividend on Series
C Convertible Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,206Accrual of Dividend on Series
D Convertible Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,932Accrual of Dividend on Series
E Convertible Preferred
    
    
    339,000
    
    
    
    325,600
    
    
    
    673,800
    
    
    
    353,657Deemed dividend associated
with beneficial conversion
price on shares issued in
satisfaction of convertible
preferred dividends
    
    
    
    
    
    
    289,784
    
    
    
    
    
    
    
    927,947Deemed dividend associated
with the redemption and
exchange of outstanding
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,860,458Deemed dividend associated
with change in the
expiration date of warrants
to purchase shares of
preferred stock
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    15,000Total
    
    $
    339,000
    
    
    $
    622,884
    
    
    $
    673,800
    
    
    $
    3,786,905
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Note 11  Business Segment Information
     Three Months Ended
    
    Six Months EndedJune 30
    
    June 302005
    
    2004
    
    2005
    
    2004Revenues:Energy Technology
    
    $
    1,549,000
    
    
    $
    173,000
    
    
    $
    1,801,000
    
    
    $
    496,000Building Automation
Controls
    
    
    242,000
    
    
    
    409,000
    
    
    
    732,000
    
    
    
    902,000Intercompany sales 
Energy Technology
    
    
    
    
    
    
    (25,000
    )
    
    
    
    
    
    
    (25,000
    )Intercompany sales 
Building Control and
Automation
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Total
    
    
    1,791,000
    
    
    
    556,000
    
    
    
    2,533,000
    
    
    
    1,372,000Operating Loss:Energy Technology
    
    
    (1,123,000
    )
    
    
    (520,000
    )
    
    
    (1,578,000
    )
    
    
    (1,033,000
    )Building Automation
Controls
    
    
    (125,000
    )
    
    
    (124,000
    )
    
    
    97,000
    
    
    
    (232,000
    )Corporate Overhead
    
    
    (338,000
    )
    
    
    (372,000
    )
    
    
    (712,000
    )
    
    
    (749,000
    )Total
    
    
    (1,586,000
    )
    
    
    (1,016,000
    )
    
    
    (2,193,000
    )
    
    
    (2,014,000
    )Interest Expense, net
    
    
    (239,000
    )
    
    
    (129,000
    )
    
    
    (307,000
    )
    
    
    (489,000
    )Net Loss
    
    
    (1,825,000
    )
    
    
    (1,145,000
    )
    
    
    (2,500,000
    )
    
    
    (2,503,000
    )
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June 30,
    
    
    December2005
    
    

31,2004Total Assets:Energy Technology
    
    $
    15,691,000
    
    
    $
    5,824,000Building Automation
Controls
    
    
    630,000
    
    
    
    1,530,000Total
    
    $
    16,321,000
    
    
    $
    7,354,000
 Note 12  Equity Issuances
 (a)
    
    During the first six months of 2005, two holders of the Companys Series E Convertible
Preferred Stock converted 2,157 shares of Series E Convertible Preferred Stock into 215,700
shares of common stock.
 (b)
    
    During February 2005, the Company issued a five year warrant to purchase 30,000 shares at
$1.03 to Delano Group Securities, LLC, a company owned by Mr. David Asplund, one of the
Companys directors pursuant to an agreement to provide investment banking services. The
warrant was valued at $13,200 using a modified Black-Sholes option pricing model utilizing the
following assumptions: risk free rate of 2.53%, expected volatility of 45.3%, expected
dividend of $0 and expected life of 5 years. The warrant was charged to operations during the
period.
 (c)
    
    During March 2005, the Company issued a three year warrant to purchase 100,000 options at
$1.13 per share to M&A Railroad and Electric Supply, LLC (M&A) as part of a settlement
agreement. This warrant was valued at $35,000 using a modified Black-Sholes option pricing
model utilizing the following assumptions: risk free rate of 2.767%, expected volatility of
45.0%, expected dividend of $0 and expected life of 3 years. Of the total warrant value
$33,000 was charged to operations during the forth quarter of 2004 and $2,000 was charged to
operations during the first quarter of 2005.
 (d)
    
    On April 28, 2005 Electric City issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 6,250,000 shares of the Companys common stock and 42
month warrants to purchase 3,125,000 additional shares of common stock at $1.05 per share
(collectively the PIPE Transaction or the PIPE). Warrants to purchase 2,100,000 shares of
common stock are immediately exercisable and the remaining warrants become exercisable six
months after closing. Net proceeds from the transaction were approximately $5,408,000, of
which approximately $1,644,000 was used to fund the acquisition of Maximum Performance Group,
Inc., as discussed in Note 5. The Company has committed to file a registration statement to
register the shares issued pursuant to the PIPE Transaction within five business days of the
effective date of the S-3 Registration Statement which was filed on March 18, 2005, and to
have the registration statement declared effective within 90 days of its filing date (the
Registration Default Date). If the Company fails to have the registration statement
declared effective by the Registration Default Date it will owe the PIPE investors a cash
penalty equal to of 1/30th of 1% of the gross proceeds of the PIPE for each day
between the Registration Default Date and the date the registration becomes effective, up to a
maximum of 12%.
 Delano Group Securities LLC and and Mr. David Valentine acted as advisors on the PIPE
Transaction. The Company paid Delano Group Securities LLC $16,250 and 50,000 shares of common
stock and Mr. Valentine 50,000 shares of common stock for their services. Mr. Asplund and Mr.
Valentine both serve as directors of Electric City.
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(e)
    
    On May 3, 2005, pursuant to an Agreement and Plan of Merger dated as of April 29, 2005, by
and among Electric City Corp., MPG Acquisition Corporation (the Merger Subsidiary), a
wholly-owned subsidiary of Electric City, and Maximum Performance Group, Inc. (MPG),
Electric City acquired MPG pursuant to the merger of MPG with and into Merger Subsidiary, with
Merger Subsidiary continuing as the surviving corporation under the name Maximum Performance
Group, Inc. The merger consideration consisted of $1,643,525 in cash, 2,509,708 shares of
Electric City common stock and approximately 2,509,708 additional shares which have been
placed in escrow. If MPGs revenues during the two years following the merger exceed an
aggregate of $5,500,000 the escrow shares will be released to the former stockholders of MPG
at the rate of 202 shares for every $1,000 of revenue in excess of such amount. The escrow
            shares are also available to satisfy any indemnification claims which the Company may have
under the Merger Agreement. If the shares are not released to the selling shareholders of MPG
during the two year period they will be returned to the Company and cancelled. As a part of
the transaction the former stockholders of MPG entered into a stock trading agreement with the
Company which restricts their ability to sell shares of the Companys common stock under
certain circumstances.
 Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 125,485 shares of common stock for its services. These shares were valued at $1.00 per
share, which was the closing market price of the Companys common stock on April
28th. In addition, the Company will issue up to 125,485 additional shares of common
stock to Delano as the MPG shares held in escrow are released. Delano Group Securities LLC is
owned by Mr. David Asplund, one of Electric Citys directors.
 (f)
    
    The Company issued a warrant to purchase 400,000 shares of its common stock to Laurus Master
Fund, Ltd. in exchange for its consent to the Company entering into the PIPE Transaction and
acquiring MPG, as well as waiving its right to adjust the conversion price on its convertible
term note and convertible revolving note. The warrant has an exercise price of $1.00 per
share and a term of five years. The warrant was valued at $160,000 using a modified
Black-Sholes option pricing model utilizing the following assumptions: risk free rate of
2.941%, expected volatility of 43.7%, expected dividend of $0 and expected life of 5 years.
The value of the warrant was charged to interest expense during the period.
 (g)
    
    During the first six months of 2005, the Company issued warrants to consultants to purchase
410,000 shares of common stock with an exercise prices between $1.00 and $1.03 per share and
terms of three to ten years. The warrants were valued collectively at $144,600 using a
modified Black-Sholes option pricing model utilizing the following assumptions (depending on
the warrant being valued): risk free rate of 2.366% to 3.029%, expected volatility of 40.7% to
46.5%, an expected dividend of $0 and an expected life of 3 to 10 years. The values of the
warrants were charged to operations during the period.
 (h)
    
    During the first six months of 2005, the Board of Directors declared dividends payable on the
Companys Series E Convertible Preferred Stock of $673,800. The dividends were paid with 6,738
additional shares of Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of the Companys common stock.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
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
    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our non-manufacturing management, supervisory and staff salaries and
employee benefits;
    
    commission costs related to our independent sales representatives and our distributors;
    
    costs related to insurance, travel and customer entertainment and office supplies costs
and the cost of non-manufacturing utilities;
    
    costs related with marketing and advertising our products;
    
    costs of outside professionals such as lawyers, accountants, and investor relations
professionals;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the existing businesses
of the Company, as well as to provide the infrastructure for future growth.
  Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004.
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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004.
   - 22 -




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1 2
 Liquidity and Capital Resources
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Six months ended June 30,
    
    2005
    
    2004Net cash used in operating activities
    
    $
    (3,213,326
    )
    
    $
    (1,871,979
    )Net cash used in investing activities
    
    
    (1,846,233
    )
    
    
    (11,804
    )Net cash provided by financing activities
    
    
    7,195,809
    
    
    
    3,276,965Net Increase in Cash and Cash Equivalents
    
    
    2,136,250
    
    
    
    1,393,182Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    3,926,058
    
    
    $
    3,860,205
 Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004.
  Operating Activities
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Investing Activities
   Financing Activities
   LIQUIDITY
    - 26 -




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
    
    Successfully execute on the ComEd and PacifiCorp contracts. We believe that this is
important from several different perspectives. We believe the contracts will establish
Electric City as the leader in negative power development, thereby supporting VNPP
opportunities with other utilities. We also believe the contracts will lead to increased
commercial sales of the EnergySaver as host customers who participate in the VNPP programs
with operations outside the territories covered by the VNPPs gain exposure to the
technology. We have already seen VNPP host customers place such direct orders for
EnergySaver systems. Both of the ComEd and PacifiCorp projects are currently under
contract, therefore we are focusing a great deal of our resources on these projects and
will be hiring additional personnel as needed in an attempt to keep the projects on
schedule.
    
    Increase the profitability of EnergySaver sales. Increasing the margins earned on
EnergySaver sales will also have an immediate and positive impact on our cash flow. We
have seen improvements in EnergySaver margins at times over the past three years with
increases in volume. We believe that increased volumes that will result from the VNPP
programs will lead to consistently higher margins as a result of increased capacity
utilization.
    
    Secure additional VNPP projects. We are currently in discussions with several utilities
regarding implementing VNPP programs in their service territories. Recent legislative
actions by some states are encouraging or mandating utilities to include demand reduction
goals in their long term energy plans. We believe we are well positioned to take advantage
of these new requirements. Securing one or two additional VNPP contracts during 2005
should lead to improvements in cash flow beginning in 2006 and, we hope, to increased
profitability.
    
    Expand and improve the product line through internal development or acquisition. We
would like to develop or acquire additional cost effective demand response technology that
we can incorporate into our VNPP offering and we want to find ways to reduce the cost of
our current technology. The recently completed acquisition of Maximum Performance Group, a
manufacturer of an air conditioning control technology, is directly related to this
strategy. Our ability to continue to successfully execute such a strategy should further
expand our opportunities with utilities and increase the rate of VNPP development (by
allowing us to control additional load with existing customers), thereby improving our
profitability.
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
    
    Build on the recent project successes at Great Lakes Controlled Energy to make the Building
Controls and Automation business grow and become profitable. Great Lakes has recently
successfully completed certain projects which have contributed to improvements in our
overall profitability and cash flow. Great Lakes successful execution on these projects
has led to opportunities to bid on other significant projects. If this segment continues to
improve as it has during the last two years, we believe this segment will record a profit
for the full fiscal year 2005 and remain profitable in future years.
    
    Continue to aggressively manage our costs in order to conserve cash. While we made
significant progress in reducing our costs during the last several years, we must continue
to effectively manage all of our costs so that they do not negate the improvements in
profitability we are working to create in our Energy Technology and Building Automation and
Control segments.
    
    Secure additional capital as needed to continue to fund operations until the business
turns cash flow positive. Our ability to raise additional capital in the future will
depend a great deal on our ability to make progress toward the goals outlined above.
   Cautionary Note Regarding Forward-Looking Statements
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Quantitative and Qualitative Disclosures About Market Risk
 1 2
 
 Controls and Procedures
 a.
    
    Evaluation of disclosure controls and procedures.Our chief executive officer and chief financial officer, after evaluating the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of
the period covered by the report, have concluded that our disclosure controls and procedures
were effective as of the end of the period covered by the report.b.
    
    Changes in internal controls.There were no significant changes in our internal controls or in other factors that could
significantly affect the Companys internal controls during the period covered by the
report.c.
    
    Disclosure controls and procedures.Disclosure controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
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PART II. OTHER INFORMATION
 
 Changes in Securities
 (1)
    
    On April 28, 2005 we issued to five (5) institutional investors, for an aggregate purchase
price of $5,625,000, 6,250,000 shares of our common stock and 42 month warrants to purchase
3,125,000 additional shares of common stock at $1.05 per share (the PIPE Transaction).
Warrants to purchase 2,100,000 shares of common stock are immediately exercisable and the
remaining warrants become exercisable six months after closing. Net proceeds from the
transaction were approximately $5,408,000, of which approximately $1,644,000 was used to fund
the acquisition of Maximum Performance Group, Inc., as discussed in Note 5 to the consolidated
financial statements.(2)
    
    On May 3, 2005, pursuant to an Agreement and Plan of Merger dated as of April 29, 2005, by
and among Electric City Corp., MPG Acquisition Corporation (the Merger Subsidiary), a
wholly-owned subsidiary of Electric City, and Maximum Performance Group, Inc. (MPG),
Electric City acquired MPG pursuant to the merger of MPG with and into Merger Subsidiary, with
Merger Subsidiary continuing as the surviving corporation under the name Maximum Performance
Group, Inc. The merger consideration, subject to post closing adjustments, consisted of
$1,643,525 in cash, 2,509,708 shares of Electric City common stock and approximately 2,509,708
additional shares which have been placed in escrow. If MPGs revenues during the two years
following the merger exceed an aggregate of $5,500,000 the escrow shares will be released to
the former stockholders of MPG at the rate of 202 shares for every $1,000 of revenue in excess
of such amount. The escrow shares are also available to satisfy any indemnification claims
which we may have under the Merger Agreement. As a part of the transaction the former
stockholders of MPG entered into a stock trading agreement which restricts their ability to
sell shares of our common stock under certain circumstances.(3)
    
    Delano Group Securities LLC acted as an advisors on the PIPE Transaction and the acquisition
of MPG and Mr. David Valentine acted as an advisor on the PIPE Transaction. We paid Delano
Group Securities LLC $98,426 and 50,000 shares of common stock and Mr. Valentine 50,000 shares
of common stock for their services. In addition, we will issue up to 125,485 additional
            shares of common stock to Delano as the MPG shares held in escrow are released. Delano Group
Securities LLC is owned by Mr. David Asplund. Mr. Asplund and Mr. Valentine both serve as
directors of Electric City.(4)
    
    We issued a warrant to purchase 400,000 shares of our common stock to Laurus Master Fund,
Ltd. in exchange for its consent to the PIPE Transaction and the acquisition of MPG, as well
as waiving its right to adjust the conversion price on its convertible term note and
convertible revolving note. The warrant has an exercise price of $1.00 per share and a term
of five years. The warrant was valued at $160,000 using a modified Black-Sholes option
pricing model utilizing the following assumptions: risk free rate of 2.941%, expected
volatility of 43.7%, expected dividend of $0 and expected life of 5 years. The value of the
warrant was charged to interest expense during the period.(5)
    
    During the quarter ended June 30, 2005, we issued warrants to consultants to purchase 60,000
shares of common stock with an exercise price of $1.00 per share and terms of three to ten
years. The warrants were valued collectively at $30,100 using a modified Black-Sholes option
pricing model utilizing the following assumptions (depending on the warrant being valued):
risk free rate of 2.931% to 3.029%, expected volatility of 40.7% to 43.7%, an expected
dividend of $0 and an expected life of 3 to 10 years. The value of the warrants was charged
to operations during the period.
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(6)
    
    On May 4, 2005, our Board of Directors declared dividends payable on our Series E Convertible
Preferred Stock for the calendar quarter ending June 30, 2005 to shareholders of record of the
Series E Convertible Preferred Stock as of June 30, 2005. The dividends were paid with 3,390
additional shares of Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock.
 
 Submission of Matters to a Vote of Security Holders.
      Director
    
    For
    
    WithheldDavid R. Asplund
    
    
    37,825,074
    
    
    
    1,551,093John C. Bukovski
    
    
    39,189,484
    
    
    
    186,683Robert J. Manning
    
    
    39,202,444
    
    
    
    173,723John P. Mitola
    
    
    39,190,344
    
    
    
    185,823Gerald A. Pientka
    
    
    39,187,684
    
    
    
    188,483Michael S. Stelter
    
    
    39,198,444
    
    
    
    177,723
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Exhibits.
 31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 SIGNATURES
  ELECTRIC CITY CORP.:Dated: August 15, 2005
    
    By:
    
    /s/ John MitolaJohn MitolaChief Executive Officer (principalexecutive officer)Dated: August 15, 2005
    
    By:
    
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principalfinancial and accounting officer)
 - 32 -